When Options Market Disagrees

Goyenko Ruslan ,
McGill University

Fournier Mathieu ,
HEC Montreal

Grass Gunnar,
HEC Montreal

Using equity options’ signed order flows we construct cross-sectional disagreement measures by investor type: customer (client accounts) and intermediary (proprietary trading desks). Both types of disagreement negatively predict stock returns but for different reasons. Using a comprehensive news database, we establish that client-account originated order flows disagree about both positive and negative firm specific news and their predictive effect for stock returns is consistent with theories of investors’ optimism. In contrast, the predictive effect of prop-desks disagreement for stock returns largely stems from periods with negative macro-economic news. This suggests that dispersion of opinions among sophisticated investors is not driven by optimism or asymmetric information but rather by macro-economic uncertainty.